Manage results, not budget

Every year in the 4th quarter, businesses across the board are busy budgeting, because it means how much money can be spent and done next year. But in fact, for an enterprise, budget is not the top priority, whether it can produce high performance is the most important. Douglas K. Smith, an organizational performance management consultant, pointed out the drawbacks of focusing too much on budgets in this article, and suggested that companies should focus most of their energy on quality improvement, speed improvement, structural reorganization, technological innovation and strategic alliances in the formulation of annual plans. Goal setting and action plans for performance, not just headcount and expenses.

This article is a great read for managers at all levels to help you create a budget that really works.

The annual planning and budgeting process often becomes too formal, lengthy, and resource-intensive. And, while the budget is important, it is often a waste of time. Read the story below:

The Long Number Game

One day in June, GrandVision's chief operating officer, Mary, met with the company's executive officer (CEO) to discuss next year's annual plan and budget. The CEO just painted securities analysts a bright future for the company in May -- double-digit growth in both revenue and profit. "Now we have to deliver on our promises," the CEO told Mary, "and we have to have more control over headcount and expenses and more challenging targets."

Mary spent most of June with Mary Her deputy general manager of finance plans together: how much manpower and expenses need to be arranged in the budget. Mary wants the budget to be tighter, but not too tight, because enough manpower and funds are needed to implement the CEO's strategic decisions, such as quality improvement, speed improvement, restructuring, technological innovation, and strategic alliances.

In July, Mary called her men to the office. "Dick," she said earnestly, "this year we're going to be stronger in terms of headcount and expense control. What do you suggest?" Dick invited Tom, his direct report, to lunch the next day. Dick repeated Mary's instructions. Since there are only eight people in Tom's department, and there are very few expenses other than wages, Tom does not have much room for manoeuvre. For most of August, Tom and the people in his department worked with the budget data, and they talked a lot about quality, speed, reorganization, and other big challenges they faced, but little thought on how to do it, and attention was lost. Those budget figures get in the way.

The following month, Tom, Dick, and Mary each present their own draft plans to their bosses. Everyone understands that their numbers will be rejected, and this is just the beginning of the budgeting process. Sure enough, everyone was told to reconsider their plans.

October, November, and until December, Tom, Dick, and Mary went back to the work process they had done the previous months. While everyone talks a lot about the quality, speed, and other strategic decisions to be implemented, as the days and nights of winter draw nearer, Tom, Dick, and Mary's work has only one goal in mind: to deliver it in mid-December. An annual plan and budget with the correct and optimal numbers in it.

They finally did it! The managers were in high spirits for the hard-to-refresh Christmas break. Everyone comes back to work in January ready to go all out on quality improvement, speed improvement, restructuring, technological innovation, and strategic alliances. These efforts have no specific goals, but they know the work is important and planned.

One morning shortly after returning to work, as Mary was preparing for her January 15 meeting, "Take the Challenge of the Year", the phone rang. On the other end of the phone is the CEO. "Mary," he groaned, "I have bad news."

"Oh, no," cried Mary. "It's not about the budget, is it?"

"No, the budget is good. But we need to review last year's numbers. If we're going to meet securities analysts' expectations, we'll have to reduce our current production reserves. Can you? Temporarily put aside other work until the fifteenth day of the month?"

A budget disconnected from performance

Is this a parable? not quite. It happens every year in a certain organization. Despite the time and effort you put in, this budgeting process is flawed in at least three ways:

First, it focuses on activities rather than results. In effect, performance begins with outcome-based goals, not activity-based goals. For example, if you must improve the level of customer service, then your goals must include increased speed, correct information, reduced errors, customer satisfaction, customer repurchase, and so on. In contrast, activity-based goals are nothing more than repeating what people plan to do.

Effective goals are "SMART" - Specific, Measurable, Relevant, Time-bound. If a financial metric is a valid measure of success, use it as a target. But if time, speed, satisfaction, quality, new products, new services, customer relationships, or other metrics are a better measure of success, then use them as outcome-oriented "SMART" goals and stop Routinely use revenue, expenses, or headcount as the basis for setting goals.

Second, such budgets cannot be used to directly measure the company's key operating performance. GrandVision's CEO assured securities analysts of "double-digit revenue and profit growth." How can GrandVision be successful? Certainly by improving those key performances: quality improvement, speed improvement, restructuring, technological innovation, strategic alliances, etc. Revenue, spending and people are all lagging and indirect measures, and financial data does not reflect the success of an activity in an organization.

Finally, this kind of budget does not encourage people to perform better. Goals should motivate employees as much as rewards. When people set goals such as reducing defects, reaching new service levels, seeking new customers, or developing new markets, their work enthusiasm and sense of accomplishment are greatly increased.

Challenging Key Performance Objectives

Jennifer Dunlap, Vice President of the American Red Cross, decided to improve the budgeting process with an outcome-focused approach. As Head of Corporate Services, she is responsible for HR, Marketing, PR, Fundraising, Government Relations and International Services. Jennifer Dunlap asked her employees to prepare a budget in the usual sense for the next year, and these budgets should contain some simple and necessary elements. The department's plan focuses on the major challenges faced and the results-based goals to meet those challenges.

For each performance challenge, she asks managers to set one or more outcome-based goals, along with a plan of action needed to achieve them. For example, there is a need to establish strategic partnerships with other companies in marketing. Instead of focusing on budget and headcount, the marketing department clearly defines one or more outcome-based goals, such as the number and timing of partnerships, and how important each partnership is.

Dunlap reminds everyone that the corporate services segment faces many opportunities and challenges far beyond its own resources and must make choices. In addition to cash spending and benefits, speed, skills, talent, quality and partnerships need to be considered when making decisions.

Instead of the pain and anxiety of discussing budgets, people work hard to analyze and define the results they want to achieve and what those results mean for shareholders, customers, employees and patrons. Many managers in the corporate services division realize that they now have to spend a lot of time talking to people who have first-hand information. There are many performance challenges that require consensus within departments, and even consensus across the organization, prompting managers to seek empowerment from above to successfully set results-based goals. This creates a more integrated challenge that can only be accomplished through teamwork across departments, rather than the traditional way of working in isolation in the planning and budgeting process.

Has the Corporate Services Division developed and submitted a budget? The answer is yes. But managers spend most of their time planning and budgeting on more important things—with clearly defined and agreed-upon key performance challenges and results-based goals, so they can help the organization's shareholders, customers, Sponsors and employees make significant contributions.

Build a performance and outcome measurement system

How can managers tame the budgeting and planning monster? First, stop playing the numbers game. Make budgets and plans part of your performance and results management system. The overall performance and results management system includes: the performance challenges that the organization pursues; results-based work objectives to measure success; timetables for achieving success objectives; and the people (individuals or groups) responsible for achieving those objectives.

In order to implement such a system, you and your colleagues must:

Use performance challenges, rather than departmental and functional considerations, as the basis for planning and setting goals. For example, GrandVision should establish a program that directly addresses quality improvement, speed improvement, restructuring, technological innovation, and strategic alliances. So, should there be an operating budget? Yes, but reviewing and updating budgets should only be considered if operational costs and staffing have an impact on performance-related challenges.

Group each person according to the performance challenge area for which they are responsible and ask them to set and achieve outcome-based goals. For decades, performance has often occurred in simple, isolated places: individuals, departments, etc. Today, performance often occurs in more complex and dynamic places: project teams, business processes, and strategic alliances.

Each performance challenge and its associated area of work should have SMART goals and benchmarks. Planning, budgeting, and review procedures should help answer the following questions:

• What are the current performance challenges?

·In these challenges, what achievements are the hallmarks of success?

·What areas of work do these challenges fall into and how many people are needed?

·What areas of work can I or we contribute to?

·What outcome-based goals should we set in order to contribute?

Although well-intentioned, the annual planning and budgeting process has now gradually degenerated into mathematical and administrative actions with little connection to performance. Most companies have abandoned cumbersome processes and simply require their financial institutions to provide the necessary spending and revenue planning to ensure overall business performance. In fact, we can do even better, and every organization can deliver outstanding, ongoing value to customers, shareholders or sponsors, and employees by implementing performance and outcome measurement systems. By doing so, organizations will be able to perform "better than planned."

This article is excerpted from Better Than the Plan: Managing Beyond the Budget by Douglas K. Smith, 15 books in the Leader to Leader series, with permission from Jossey-Bass, The Wiley Group , published in the winter of 2000. Copyright 2000 by Jossey-Bass Company, All Rights Reserved. Translated by Zhu Yun.

Douglas K. Smith is a management consultant specializing in organizational performance, innovation and change. He is listed in The Guru Guide as one of the world's leading management thinkers, and he is the author or co-author of 5 books, including Make Success Measurable.